In the News

Michael Livermore…with New York University, said the government’s social cost of carbon analysis is not perfect. He would like to see a higher price per ton, and more consideration given to potential catastrophic risk. (Requires subscription.)

This week, the Environmental Protection Agency will do more than set new fuel efficiency standards for cars. It will put a price on carbon. Within this historic climate change regulation is a powerful new way of thinking about greenhouse gas emissions: as costs that will borne by society. Burning oil in cars imposes a steep price tag, from dirtier air now, to more expensive flood insurance in a decade, to potential climate catastrophe for our grandchildren.

“The countries that move first to a low-carbon economy are definitely going to have a head start in terms of relative growth rates,” said J. Scott Holladay, an economics fellow at New York University School of Law’s Institute for Policy Integrity. “In the not-too-distant future there is going to be a huge market for green energy, and it feels like the Scandinavian countries and Germany are leading that charge, and China is quickly catching up. In the U.S., it doesn’t seem to be a huge policy priority.”

Earlier this week, several environmental groups fired off a letter to the Obama administration condemning the Office of Management and Budget (OMB). Their complaint? The green groups believed that OMB was incorrectly devaluing the cost savings that would come from a new EPA rule on vehicle fuel efficiency. Many greens were outraged. And if OMB was doing what it was accused of doing, it would be a real outrage. Except that, as it turns out, OMB was doing no such thing.

Details about the forthcoming Kerry-Graham-Lieberman climate bill are still as hazy as the smog over the San Fernando Valley. But one tidbit has already trickled out: The Senate proposal would, in all likelihood, eliminate the EPA’s authority to regulate greenhouse gases under existing law. This is something industry groups have demanded in exchange for the creation of a CO2 cap-and-trade program set by Congress. Environmentalists, by contrast, see the EPA’s Clean Air Act authority as sacrosanct. It’s possible, however, to find a compromise here.

Strictly from an economic efficiency perspective, you’re better off with either an economy-wide cap-and-trade policy or an economy-wide carbon tax,” says Michael Livermore, executive director of the Institute for Policy Integrity at New York University Law School.

Unless the carbon tax on fuel is exactly equal to the price of the permits traded between power plants — in which case it’s no different than an economy-wide cap-and-trade system — electrical companies and oil companies will have different financial incentives to offset the same quantity of emitted carbon, Livermore says.

The most important addition that Senators Kerry, Graham, and Lieberman can make to the climate bill is a refund provision similar to the Cantwell-Collins proposal. Without some mechanism to compensate Americans for rising energy prices, middle and lower income families will be stuck with the tab for our transition to cleaner energy, which is both bad policy and bad politics.

But some economists are wondering whether the attempt to gain political traction is coming at the expense of what makes the most sense policy-wise.

The majority of 144 economists polled by New York University’s Institute for Policy Integrity, or 84%, agree that global warming’s effects “create significant risks” to the economy, and 94% agree that the United States should join climate agreements to limit global warming.

Under President Bush, not much happened at the federal level when it came to climate change. During that bleak time, environmentalists could at least look to the states for a glimmer of progress. States in several regions organized carbon cutting initiatives and proposed some moderate but important greenhouse gas reductions. These local, largely market-based programs could jump-start America’s climate efforts and prove to the nation that cap-and-trade is not a dirty word.